Economic Reforms introduced since 1991 have radically changed the course of the Indian economy and led to better growth rates, higher investment and trade flows and accelerated decline in income poverty. The effects of these reforms on trade and investment relations with the United States have been profound.

TRADE

Though, the trade between the United States and India is relatively small, it has risen sharply over the years. In terms of India's major trading partner, USA continues to lead. However, India's share in US trade is 24th in US export and eighteenth in US imports. The two countries have been making efforts to strengthen institutional structure of bilateral economic relations. Signing of "India-US Economic Dialogue" by Indian PM AB Vajpayee and US President Bill Clinton in 2003, aims at deepening the Indo-American partnership through regular dialogue and engagement.

India's sizable population and growing middle and higher income class makes India a potentially large market for U.S. goods and services. According to the figure from government sources, U.S. exports to and imports from India in 2003, totalled US $5.0 billion and US $13.1 billion, respectively.

United States is India's second largest source of FDI (after Mauritius), accounting for or 16% of total FDI flows to India from 1991 through July 2001. USA has 17.08% share in FDI inflows to India, While Mauritius is at top with 34.49% and Japan comes 3rd with 7.33% share.

On investment front, USA covers almost every sector in India, which is open for private participants. Both government-to-government level and business-to-business level conduct regular interactions with each other to promote and strengthen the trade and economic interactions between the two countries.

The US investor community is today increasingly sharing confidence in the future of the Indian economy.Several areas like infrastructure, IT, Telecom sector, energy and other knowledge industries such as pharmaceuticals and biotechnology, possess immense potential for progressing economic cooperation between India and the US.

The Government of India is continuously reviewing its policies to create an investor friendly environment in sectors such as roads, ports and airports. Private sector participation in management, BOT projects, green-field airports, terminals and shipping berths and capacity augmentation has been initiated.

FDI in banking is permitted up to 49%. US Success stories in this sector include Citicorp, GE Capital, and American Express. The insurance sector in India is opened up for up to 26% FDI. However, there are proposals to hike this limit to 49%. US companies that have successfully entered this field in India include New York Life, AIG and Chubb.

A very important aspect of US India economic relations comes with the emergence of Business Process Outsourcing, where in many US companies are reaping the advantages offered by India's IT sector. India offers a large pool of trained, English speaking personnel, which offers huge cost benefits to the US MNCs.

Several big names like, American Express, Citicorp, Microsoft, Dell, Hewlett-Packard, HSBC, Standard Chartered and Convergys etc are taking advantage of the opportunities offered by India's IT Sector. Other such as Morgan Stanley, AT&T, Reebok, GM, Fujitsu, Boeing, Pepsi, Swissair, Coca-Cola and British Airways have identified India as their outsourcing partner. Many more corporations across the globe are following suit.

In the coming India Telecom - an international business conference focusing on India's telecom industry - scheduled for May 18-19 at Washington DC, Indian telecom companies will present market information about products and services, administrative initiatives to the US suppliers. Amongst major US companies that have entered the Indian market are AT&T and Qualcomm. In addition, in the realm of biotechnology, many US companies are operating their business. In recent years India has also made progress in expanding their investment base in the United States of America. When a few years back India was struggling to meet the quickly-changing demands of the global marketplace, today, it has joined the ranks of countries whose economies are on the upswing. India's UB has bought breweries in the US while companies such as Dr. Reddy's Laboratories and Ranbaxy have bought pharmaceutical manufacturing units in the US. In the IT sector, Tata Infotech, Sathyam, Infosys and WIPRO have large operations based in the US. Wipro India announced, November 12th, that it had entered into a definitive agreement to acquire the global energy practice of American Management Systems for an aggregate consideration of $26 million, payable in cash. The move strengthens Wipro's end-to-end IT solutions capability in the energy and utilities market. PEOPLE TO PEOPLE LINKAGES

Another important aspect of India-US economic relations is the huge number of people of Indian origin residing in the US. These people according to some surveys conducted in the US, contribute a lot to US economy and are among the most highly educated class in America. Relaxations in Visa norms by the US administration is considered as a vital step to boost the existing relations between the two countries.

WHAT IS NEEDED

However, a number of factors continue to hamper economic ties between the two countries. US criticizes India for maintaining high tariff rates on imports (especially on products that compete with domestic products), and levying high surcharges and taxes on a variety of imports and imposing non-tariff barriers on US exports to India.

In order to capture more US investment and trade share, India is required to further relax its trade and investment regimes, accelerate privatization of state firms, cut down on corruption, and substantially boost spending on its in physical and human infrastructure. For this significant steps are required to eliminate government deficits and the high level of public debt that severely hamper the ability of the government to boost spending for needed infrastructure projects.

Also, US as like many other developed countries continue to provide undue protection to its agriculture that harms the interests of millions of poor farmers in India. Protection in the developed countries in the form of farm subsidies causes over production in these rich countries at the expense of potentially more competitive products from developing countries and aggravates global income inequalities. India has been successful in forming a group of 20 developing nations called the G-20, which has asked the US and other rich countries to remove the subsidies given to their rich farmers. The coming round of DOHA trade talks in Dec 2005, will hopefully lead to some decision in India's favour.

The steps taken by the Government of India in providing a boost to foreign investment in India include, increase in foreign ownership limit, reduction of regulatory charges, moving to unified licensing and spectrum policy, bringing about comprehensive broad band policy and revamping of national telecom policy.

India's Telecommunication sector, already a major recipient of US investment, is expected to continue to provide substantial opportunities to US investors. The proportion of households moving towards richer and well to do category is going up in India. There also exist huge untapped rural potential.

India's energy sector has been an important destination for US investment. Since, the entry of private sector participation in generation, distribution and transmission in power sector, further liberalization . Considering the vast present and projected demand supply gap, there is tremendous potential for economic cooperation between the two countries in this area. Pharmaceuticals, biotechnology and chemical industries also provide great opportunities for closer cooperation.

Recently, the US India Business Council (USIBC), along with FICCI, has launched a Knowledge Trade Initiative (KTI). KTI aims to strengthen Indo-US leadership in the knowledge economy by harmonizing bilateral positions on key issues affecting knowledge trade. This is expected to provide a fillip to Indo-US relation further. Thus, given the comparative advantages of the two countries, there is a tremendous scope for further strengthening the business ties between the two countries in this sphere.

Newsletter Signup

Contributors

Nouriel Roubini, a.k.a. “Doctor Doom”, is chairman of Roubini Global Economics and professor of economics at New York University’s Stern School of Business. Roubini has been consistently cited as one of the world’s top global thinkers. This year, he was voted as the most influential economist in the world by Forbes magazine.

Chancellor of the Exchequer of the United Kingdom from 1992 to 2007. Prime Minister of the UK between 2007 and 2010. Inaugural 'Distinguished Leader in Residence' at New York University. Advisor at World Economic Forum

Mario I. Blejer is a former governor of the Central Bank of Argentina and former Director of the Center for Central Banking Studies at the Bank of England. Eduardo Levy Yeyati is Professor of Economics at Universidad Torcuato Di Tella and Senior Fellow at The Brookings Institution.